Question: Same bank as in #1. Now we are going to hedge the Banks Balance Sheet with 10y UST Bond Put Options. If the Put

Same bank as in #1. Now we are going to hedge the Bank’s Balance Sheet with 10y UST Bond Put Options. If the Put δ = 0.5, the Duration of the 10y UST is currently 8.3 and one 10y UST Bond has a value of $925 per $1000 principal, what number of Put options are expected to create the hedge?

Assume, whereas there is a 0.75% change to interest rates in all the Bank’s Balance Sheet Assets and Liabs, and a continued 8% YTM, assume the 10y UST experiences only a 0.5% change in rates with an underlying 7% YTM.

Show, given the stated Interest Rate change, that you have achieved this hedged result.

What is the effective reduction in Bank Equity variation by hedging, given the stated interest rate changes?

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